To print article, click Print on your browser's File menu. Go back Posted 8/2/2001 Related Resources Keep track of Victor Niederhoffer and Laurel Kenner's picks on their Recommendations page. Follow their Dow Reversals portfolios. Share your biotech thoughts and studies at this message-board thread. Never put all your chips on one thing, no matter how good. Be prepared to react immediately to opportunities. That will give you the greatest chance of making a fast profit. Recent Articles • Trade like a champion, 7/26/01 • Make money to the beat of the S&P 500, 7/19/01 • Baseball's lesson: Invest in home runs, 7/12/01 more...

sponsored by: The Speculator 9 winning serve-and-volley trading tactics Last week’s warmup should have you primed when the markets open, but a true winner is ready for anything. By Victor Niederhoffer and Laurel Kenner The market's tennis match between the bears and the bulls since Memorial Day, counted in the S&P 500 Index's wins and losses, went decisively to the bears. When the match ended Tuesday, July 23, the score was 7-5, 6-4, 10-8. New stock picks from market professionals every day on CNBC. The total game score for the period was 23 for the bears and 17 for the bulls. The cumulative loss in S&P 500 futures was 63 points, about what you'd expect given the 15-point average daily move up or down -- so tennis scoring doesn't distort the actual outcome too much. As often happens after a close loss, the rematch began with the losing side spurting ahead with alacrity. Through July 31, the bulls are ahead 4-1. Laurel and I think the bulls will go on to win the entire match over the next four months. But in the fullness of summer, and in our proverbial spirit of a meal for a lifetime rather than a day, we turn to some principles from racquet sports that are appropriate at all times in the market. Last week, I gave some ideas from my 10 years as U.S. squash champion on preparing for matches. Today, I offer some advice for tactics during the game. Win the first point On the court: In squash, the accepted strategy used to be to save the best, most powerful serves for the last few points of the game. My way was to hit the hard serve for points at the start, thus getting off to a lead that my opponents could not overcome. The first blow is nine-tenths of the game. (Once I get an early lead, I like to pretend I'm behind and play twice as hard.) In the market: To reduce the chances of starting out with an immediate loss, consider using limit orders. For example, you might buy at 0.25% below the bid and sell at 0.25% above the asked. Or buy 5% below the current market price. I used to like to place my buys at 1/8 above the round number and sell at 1/8 below, a tested method for profits when I wrote on the subject in the 1960s with M.F.M. Osborne, the Pasteur of the field. However, fast-moving day traders tell me that these days, this strategy is very naïve, and they have ways of making fixed-rule followers of the old school like me eat my own rules. Be aware of changing cycles On the court: Between games, your opponent will adjust his strategy to your play. If you've been staying back on the baseline in tennis after your serve, he'll expect you to keep doing that, so surprise him by coming up to the net. (But don't change during the middle of a game if you are winning.) In the market: After trend-following has worked for a while, be prepared to reverse. After reversalists like me have had their day, be prepared for a major trend. The winners in one month are the losers the next month, according to a study I made of trend-following funds vs. reversal funds during the 1990s. The average difference in performance was 4%. Keep a strong base of operations On the court: Other things equal, the best position in all games seems to be the center. Being in the center minimizes the longest distance you have to travel to hit an opponent's shot. I am not graceful, and when someone watched me play for the first time I would invariably hear, "THAT is NIEDERHOFFER?" after about five minutes. But in the locker room, always the following: "He's not even sweating." In the market: Maintain a position that lets you maneuver easily into good opportunities. And take a lesson from chess master Bobby Fischer, whose favorite proverb was, "I never want to get in a position where I can't put my hand around all my pieces." A hand can fit around 10 or 15 stocks, and that is enough to achieve all the reasonable benefits that diversification can provide. (This doesn't conflict with investing in index funds, where low costs, diversification and the long-term forward movement of the market work in your favor.) Don't create crises On the court: If you have the edge, don't take risks. Don't force your opponent to hit good shots. If you force him into a crisis, he may come up with a good shot. For example, if I hit a drop shot, my opponent could lunge and hit a very hard shot that I can't return. The same thing holds in poker. If you are a better player than your opponent, the last thing you want is to play him a hand where you both have all your chips in but you have a very small edge. He just might draw the lucky card. In the market: Never put all your chips on one thing, no matter how good. Failure could keep you out of the market, and there's always an edge for you in the market if you buy and hold, derive your own method or follow one of ours. Once you have an edge, maintain it and accumulate steady profits. Rome was not built in a day On the court: Play your points one at a time. Don't go for the total win with one shot. Games are not designed that way, and to try it puts you too much on the defensive. Break your opponent's game down bit by bit. First try the forehand, then the backhand, then the net. Ultimately, you will find his weak spot, and your chance will arise. In the market: The mouse with one hole is quickly cornered. Do not commit too great of a percentage of your assets to one situation. A profit from stocks is good, as is a profit from mutual funds. Don't forget the friendly bond market. Hit them on the half-volley On the court: The best time to hit the ball is on the half-volley, when it is just starting to bounce up from the court. The technique works because you draw on the ball's momentum while it's at the maximum. Your opponent isn't able to read your next move well and has less time to recover. My squash rival, Sharif Khan, held a plus record over me because he followed this method, even though he often made five times as many errors as I did. Rene Lacoste, the greatest tennis tactician, wrote that when he hit every shot on the half volley, his play improved 40 points. Today, Andre Agassi owes much success to such shots. In the market: After a big down day, come right in the next day to pick up a line of stocks. When the market starts moving up, the shorts will not have time to recover. The last 30 times the stock market dropped 2% or more in a day and then opened down, the average change from that open to the next open was 0.5%, with an average variability of 0.25%. Come up front On the court: The least-used weapon in racquet games is to go up front. At the net, you can hit much sharper angles and force your opponent to run faster and farther. Too many players spend 99% of their time perfecting ground strokes and just 1% of their time on the net game. In fact, the best way for the average player to improve is to develop a net game, as the benefits and rate of improvement are much better there. In the market: Be prepared to react immediately to opportunities. That will give you the greatest chance of making a fast profit. But be sure that you don't follow the herd in trying to react to a news announcement, as the big boys, the market boys and the top predators are quite likely to get there ahead of you. Attack on both sides On the court: Create pressure on both sides. Good players often attack on one side and then the other. By forcing the opponent to defend on both sides, you can often move in for the finish. In the market: An initial rise is often followed by a decline that gives way in turn to a final rise. On the 193 occasions in the last seven years that S&P 500 futures were up from close to 11 a.m. and down from 11 a.m. to 1 p.m., the expected move from 1 p.m. to the close was 0.2%, with a variability of about half as much and a batting average of .530. Pick up the pace On the court: At the beginning of a game when your opponent isn't yet warmed up, slow drop shots are often effective. Near the end of the match, your opponent will be faster on his feet, so make sure all your shots are much harder and faster than at the beginning. In the market: Reversing is usually grand at the beginning of months or years, but beware of reversing at the end. Since the end of 1989, a rise in S&P 500 futures over the first 11 months of the year has been followed by an average change in December of 4%. If there was a loss over the first 11 months, the expected December move was just 2%. At the start of the year, however, industry groups tend to reverse direction, as professionals regroup and reallocate to capture all the easy money made by the public during the previous year. Thus, we recommended beaten-down Internet stocks last December and made a fast profit. A bullish prediction One of the keys to success in markets, sports or writing is to have a plan. Our own plan from inception has been to draw on the insights of our readers. Fortuitously for the last three weeks we have been writing about two of the rare subjects -- sports and music -- in which we are at least as well-informed as our average reader. In the main, however, our strength has been to draw readers into the fray and elicit their insights. Since last week's column, we have received some excellent observations about the relation of sports and markets, and we will be reporting them next week. We solicit continued contributions, and will respond to all comments sent to dciocca@bloomberg.net. While we constantly point out that plans are subject to cycles, it's important to have a certain stick-to-it-iveness if your plan gives you an edge. The sine qua non of our own current plan has been that this year's moves would be the opposite of last year's. Last year's final months were quite bearish. Thus, in accordance with our plan, we are tilting toward the bullish side through the end of this year. The market match between the bulls and the bears has been relatively even since mid-March, when the world tennis season began. The trends we have spoken of in previous columns are coalescing now, in our minds, making us believe the bulls are likely to pull ahead. The dance pattern, as described in our music column of two weeks ago, is ready for an advance. Also, the bulls have gathered strength over the period of relative weakness during the last year and a half. They are ready, in our view, to move to the ascendancy again, as is their wont. On a related note, as we pointed out in our last column, the remaining bulls are strong players and should be capable of handling all shots that the bears can throw at them. MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.